You are here

Malaysia Faces Severe Strain as China Economy Sputters

Like any Southeast Asian economy whose trade with China is a major foundation of growth, Malaysia was bound to suffer as the Chinese economy staggered and Chinese stock markets plunged. Malaysia is China’s largest trading partner in Southeast Asia, and Malaysia-China two-way trade topped $100 billion in 2014.
But Malaysia now faces economic challenges far beyond the impact of the slowdown in the Chinese economy, as well as international investors’ apparent growing fear of emerging markets. Malaysia’s own stock market has plummeted this summer, and the Malaysian ringgit is reaching lows against the dollar not seen in nearly two decades—since the time of the Asian financial crisis, The Diplomat reported.
As John Berthelsen of Asia Sentinel noted earlier this week: Malaysia’s central bank is clearly losing the battle to defend its national currency, the ringgit, which fell to RM4.22 against $1 on Aug. 24 before recovering slightly on Bank Negara [central bank] buying… The Swiss bank UBS last Friday, Aug. 21, issued an alert saying the magnitude and speed of the currency’s decline ‘exceeded our bearish expectations,’ falling 24% against the US dollar over the past year.
Malaysia’s economy has suffered on several fronts. For one, although the Malaysian government joined negotiations for the Trans-Pacific Partnership trade deal, the slow movement on that deal, and the slow pace of completing the ASEAN Economic Community, may have made some investors rethink their commitments to Malaysia.
Since Malaysia’s workforce is no longer competitive, in terms of labor costs, with that of neighboring nations like Vietnam or Bangladesh, the completion of these trade deals is important for Kuala Lumpur to attract investment; foreign investment into Malaysia fell by nearly fifty percent year-on-year through the first half of 2015. The low global price of oil also has hurt Malaysia, a major exporter of oil and gas.
Most damaging, however, Malaysia’s months of political turmoil have unsettled both domestic and foreign investors, shaken confidence in the country’s leadership, and led to worries about the independence of Malaysia’s central bank. The continued public battle between Prime Minister Najib Razak and former prime minister Mahathir Mohamad has weakened Najib’s ability to lead, as have the swirling rumors and alleged investigations into state fund 1MDB and the supposed transfer of over $600 million into the personal offshore accounts of Najib.
Najib has never fully denied the transfer of these funds, but his allies have stated that the money did not come from 1MDB and that Najib was just holding the funds for his party to use, not for him to use on himself. Meanwhile, last month Najib dismissed several top cabinet members, including the attorney general, in what some Malaysian commentators have argued was an attempt to neuter any investigations into the funds transfer.